The definition set out in the Directive is as follows (in Article 4(1)(a):

“‘AIFs’ means collective investment undertakings, including investment compartments thereof, which: (i) raise capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors; and (ii) do not require authorisation pursuant to Article 5 of Directive 2009/65/EC;”

Part (ii) of this definition refers to the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive.

Unhelpfully, the term “collective investment undertaking” is not defined in the Directive, or in any other legislation. It appears to be wider than the UK term “collective investment scheme” which is defined in section 235 of the Financial Services and Markets Act 2000.

“The following characteristics, if all of them are exhibited by an undertaking, should show that the undertaking is a collective investment undertaking mentioned in Article 4(1)(a) of the AIFMD. The characteristics are that:

(a) the undertaking does not have a general commercial or industrial purpose; (b) the undertaking pools together capital raised from its investors for the purpose of investment with a view to generating a pooled return for those investors; and (c) the unitholders or shareholders of the undertaking – as a collective group – have no day-to-day discretion or control. The fact that one or more but not all of the aforementioned unitholders or shareholders are granted day-to-day discretion or control should not be taken to show that the undertaking is not a collective investment undertaking.”

ESMA definitions

The ESMA report defines a number of terms for the purposes of its guidance. Those definitions include the following:

“General commercial or industrial purpose” is defined as “the purpose of pursuing a business strategy which includes characteristics such as running predominantly:

(i) a commercial activity, involving the purchase, sale, and/or exchange of goods or commodities and/or the supply of non-financial services, or(ii) an industrial activity, involving the production of goods or construction of properties, or(iii) a combination thereof.”

“Day-to-day discretion or control” is defined as “a form of direct and on-going power of decision – whether exercised or not – over operational matters relating to the daily management of the undertakings’ assets and which extends substantially further than the ordinary exercise of decision or control through voting at shareholder meetings on matters such as mergers or liquidation, the election of shareholder representatives, the appointment of directors or auditors or the approval of annual accounts.”

“Pooled return” is defined as “the return generated by the pooled risk arising from acquir- ing, holding or selling investment assets – including the activities to optimise or increase the value of these assets – irrespective of whether different returns to investors, such as under a tailored dividend policy, are generated.”

Status of joint ventures

The operative terms of AIFMD do not specifically exclude joint ventures. However, recital (8) says that the Directive should not apply to them.

Policy Statement 13/5 issued by the UK’s Financial Conduct Authority considers this issue. In essence, the FCA’s view seems to be that the key question is whether all the parties have day-to-day control over the venture in question.

In the FCA’s response to question 2.47 as set out in that document, it is stated that:

“Joint ventures are often a marriage of equity and expertise, with one partner having the necessary experience to carry out the day-to-day management and the equity partner being involved in making more key, strategic decisions. The parties may also hire an outside person to manage the venture. These factors do not necessarily mean that the undertaking is an AIF. Such an undertaking may still be excluded as a joint venture if the strategic financial and operating decisions are under the control of all the parties. Each of the parties should have a continuous involvement in the overall strategic management of the undertaking.”

Status of EIS funds

The question of whether EIS funds may constitute an AIF was also considered in the FCA Policy Statement PS 13/5. (See the response to question 2.43.)

The concept of “pooled return” as set out in the ESMA guidelines does not require a pooling of the underlying property – it relates to pooling of capital, risk and return. On that basis, even though a conventional EIS fund would generally not give rise to a pooling of property (the investee companies’ shares), the FCA considers that it would constitute a collective investment undertaking and therefore an AIF (provided that the other characteristics of an AIF are also present).

Raising Development Finance from Private Investors

This report sets out 5 of the most popular structures used by developers to raise capital from private investors, distilled from our lawyers’ experience of working on investment structures for over 20 years.